Defending 90% of the top 1%

Paul Krugman has elevated his “job creators don’t matter” blog post to an op-ed with some changes that I think strengthen his argument and also implicitly acknowledge the correctness of the criticisms I made.

First, he substantially narrows the focus of his point from the top 1% to the top .1%:

If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.

Having narrowed his focus, he makes the “job creators don’t matter argument from his blog post:

Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators” — that is, that they make a special contribution to the economy. So what you need to know is that this is bad economics. In fact, it would be bad economics even if America had the idealized, perfect market economy of conservative fantasies.

After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year. There would be no reason to consider the contributions of the $30 million folks as deserving of special treatment.

Then acknowledges and agrees with the argument I made that marginal product is likely to be higher than compensation for many top earners:

Still, don’t some of the very rich get that way by producing innovations that are worth far more to the world than the income they receive? Sure, but if you look at who really makes up the 0.1 percent, it’s hard to avoid the conclusion that, by and large, the members of the super-elite are overpaid, not underpaid, for what they do.

But, having narrowed his focus to the top .1% rather than the top 1%, he argues that the contributions here are largely CEOs and financiers who do not create more value than they are paid.

So it fair to read what Krugman has and hasn’t written as an acknowledgement that the bottom 90% of the top 1% (i.e. those above 99% but below 99.9%) are indeed job creators, many of whom create more value than they are paid, and that therefore we should worry about taxing them at 70%? It seems so to me.

To turn things around, is my above non-criticism of Krugman’s narrower and substantially more modest argument an implicit acknowledgement that he is correct? I think people in the segments of finance and CEOs that Krugman focuses on are less likely to be creating value high paid individuals overall. But what percent of the financiers are venture capitalists? What percent of the CEOs are like those running Google, Apple, and Netflix? The value created by some of these people is massive, and I think the burden of proof that they are on average getting paid more than the value they create is pretty high. I have not seen anyone convincingly overcome that burden of proof. You’re certainly not going to find it in the Diamond and Saez paper Krugman cites, despite the fact that it is of first order importance to the question they’re seeking to answer.

I think both of you have missed the mark. The question isn’t which group’s salary has a 1 to 1 correspondence with value generated by the economy; rather, the question is what is the most effective way for the government to raise revenue. And that, simply, comes down to which group when taxed disproportionately lowers private spending. If I make 160K (far from the top 1%), the extra $2k I loose in a 2 percent hike in the top tier tax rate is going to effect me much less than the much greater number of people making <$65K (assuming they are similarly situated with respect to debt obligations and the like).

Not to mention the fact that the wealthier people are more likely to separate funds that are being used to run a business enterprise (for revenue raising reasons, liability reasons, and tax reasons). There is, perhaps, the motivational aspect, but even there study after study has shown that once you get into the six-digit salaries and above, any psychological effect is essentially nonexistent as far as quality of life is concerned.

Are you suggesting venture capitalists are increasing productivity for everyone else? It seems those they fund might be, but not them. And they take an unreasonably large share of the compensation by virtue of already having money. Extracting a rent would be one way to put it.

Karl’s argument is as valid as any as we have seen:
“Conversely, however, if you lower taxes and you see income inequality rise, as a result, your first guess should be that your labor supply curve is backward bending and that lower taxes actually caused some high skilled folks to stop working. Thus raising the incomes of the remaining high skilled workers.”

1. Krugman does not say that “job creators don’t matter”. He doesn’t even acknowledge that “job creator” exists as a valid concept outside the conservative fantasy/propaganda sphere.

2. The focus on the top 0.1% is not an implicit acknowledgement that the rest are “job creators”. It is an acknowledgement that the 0.1% are the primary source of income/wealth/tax inequality.

3. When someone says “by and large, the members of the super-elite are overpaid” they are explicitly DISagreeing with your assertion that “marginal product is likely to be higher than compensation for many top earners”

Krugman makes a few reasonable points in his essay but this is not one of them:

For the most part, these huge gains reflected a dramatic rise in the super-elite’s share of pretax income. But there were also large tax cuts favoring the wealthy. In particular, taxes on capital gains are much lower than they were in 1979 — and the richest one-thousandth of Americans account for half of all income from capital gains.

Given this history, why do Republicans advocate further tax cuts for the very rich even as they warn about deficits and demand drastic cuts in social insurance programs?

The real rub with this framing is that most of us who support low capital gains tax rates are not doing so for the benefit of the very rich. We do so for reasons of efficiency. Were the very rich to ‘benefit’ from such a policy, that would be a secondary (and unintentional) consequence.

If Krugman objects to that efficiency argument, he should say so and we can have a real debate. Instead we’re treated to a polemic. Even if the top 0.1% should pay more, that doesn’t mean would should accept any policy at any cost to realize that goal.